By George Smart, Financial Planner, Walker Crips Financial Planning

In recent times, pensions have been one of the most effective ways of passing wealth down the generations. Under the current rules, unused pension funds sit outside your estate for Inheritance Tax (IHT) purposes — meaning they can pass to your chosen beneficiaries without attracting a potential 40% tax charge. As a result, many people, particularly those with other income in retirement, have deliberately left their pension untouched, allowing it to grow and ultimately pass on free of IHT.

That changes fundamentally on 6 April 2027. From that date, most unused pension funds will be brought within the scope of your estate for IHT purposes. For many families, this is a significant change and one that impacts more people than you think.

In this article, I explain why this change matters, who it is likely to affect, and why now is a good time to review your position.

Why more families are already in the IHT net

It is tempting to assume that Inheritance Tax is only a concern for the very wealthy. The reality is rather different.

A combination of rising property values and frozen tax thresholds has drawn tens of thousands of families into scope. The Nil Rate Band (NRB) has remained fixed at £325,000 since 2009 and is set to stay frozen until at least 2031. Had it risen in line with inflation over that period, it would stand at considerably more than £500,000 today. In many parts of England, a family home alone can already push an estate above the available thresholds.

Based on the latest published HMRC figures, around 4.62% of estates currently pay IHT.*That proportion is projected to approach 10% by 2031, as the threshold freeze continues, property values remain elevated, and pension funds are drawn into the scope of IHT.

The “Double Taxation” problem

For many families, the upcoming change creates an uncomfortable prospect that deserves careful thought: the possibility of double taxation on the same pot of money.

For those who die before age 75, any inherited pension funds can generally be withdrawn by the beneficiary completely free of income tax. For those who die aged 75 or over, beneficiaries pay income tax at their marginal rate on any withdrawals.

If a pension fund is subject to IHT on the member's death, and beneficiaries then pay income tax on withdrawals, the combined tax liability can be severe.

Consider a pension pot of £100,000 in an estate that is already above the NRB, and the member dies aged 75 or over. Here is what the numbers can look like for a beneficiary who is an additional-rate taxpayer:

The precise figures depend on a number of variables: the size of the estate, the age at death, and the income tax position of the beneficiaries. If you would like to understand what the numbers might look like for your own family's situation, I would be happy to walk through this with you in more detail.

Could this affect your family?

This change in pension legislation is likely to be relevant to a broader range of families than many currently realise. The households most likely to be affected are those who:

• Own property in an area where values have risen significantly — even a modest home in many parts of England can push an estate above the nil rate band.
• Have accumulated a meaningful defined contribution pension through decades of employment or self-employment, but have other income in retirement and have not needed to draw on their pension.
• Are single, divorced, or widowed — the transferable nil rate band and spousal exemption are not available.
• Have not reviewed their expression of wishes, or have not taken financial planning advice for several years.

Planning opportunities worth exploring

The encouraging news is that April 2027 has not arrived yet. For those who act now, there is still meaningful time to put effective plans in place.

Areas that may be worth exploring with a qualified financial planner include:

• Pension drawdown strategies
• Regular gifts from surplus income
• Reviewing your expression of wishes
• Gifting strategies and trust planning
• Whole-of-life insurance written in trust
• Business Relief qualifying investments

Each of these areas involves a degree of complexity, and the right approach will depend on your personal circumstances, estate composition, income requirements and wider objectives.

Why now is the right time to review

While April 2027 may feel some way off, many of the most effective planning strategies take time to implement and deliver their full benefit. The seven-year clock on gifts starts the day you give, not the day you decide to. Pension restructuring requires careful income modelling. Insurance underwriting takes time. And putting a comprehensive plan in place — reviewing wills, lasting powers of attorney, expressions of wishes and your wider financial plan — is not something to rush.

This article is for general information purposes only and does not constitute personal financial advice. The scenarios and examples used are illustrative only and are not based on any individual’s circumstances. Tax rules depend on individual circumstances and may change. You should always seek regulated financial advice tailored to your own situation before making any decisions.

Source: Rathbones (https://www.gov.uk/government/statistics/inheritance-tax-liabilities-statistics/inheritance-tax-liabilities-statistics-commentary)